Disclaimer: The article has been updated to reflect Binance CEO CZ’s response to concerns raised by Kraken CEO Jesse Powell.
The FTX cryptocurrency exchange collapse Reveal the importance of proof of reserves in avoiding situations involving misappropriation of users’ funds. While exchanges have started proactively sharing wallet addresses to prove users’ funds are there, many entrepreneurs, including Kraken CEO and Co-Founder Jesse Powelldescribed this practice as “pointless” as the exchanges failed to include the liabilities.
According to Powell, a full proof-of-reserve audit should include the sum of the client’s liabilities, user-verifiable cryptographic proof that each account was included in the sum and signatures proving the custodian’s control of the portfolios. While Kraken’s Proof of Reserve allows assets to be checked against the company’s liabilities, Powell continues to call out other players who missed including accounts with negative balances.
I’m sorry but no. This is not PoR. This is either ignorance or willful misrepresentation.
The Merkle tree is just hand-corrugated crap without a validator to make sure that no accounts with negative balances are included. A statement of assets is meaningless without liabilities. https://t.co/b5KSr2XKLB
– Jessie Powell (@jespow) November 25, 2022
Powell has called out CoinMarketCap in the past for sharing incomplete proof of reserves because it lacks “cryptographic proof of client balances and portfolio control.” He reiterated that reserves are not a list of portfolios but rather assets minus liabilities.
Binance’s recently released Proof of Reserves system allows users to verify their assets using the Merkle tree. However, Powell shared his displeasure that the system failed to include accounts with negative balances, stating the following:
“The whole point of this is to understand if the exchange has more cryptocurrency in custody than it owes to customers. Putting a hash on a worthless row identifier with nothing else.”
He also called on the media and journalists to refrain from “exaggerating it and misleading consumers.” Instead, he recommended taking the time to understand the motivation behind Proving Reserves.
On the other hand, few community members disapproved of Powell’s need for a trusted auditor. – Follow up the accusation. Binance CEO Changpeng ‘CZ’ Zhao It was refuted by sharing Binance’s upcoming plans to have third-party auditors reviewing the exchange’s Proof of Reserve results.
CZ’s response to the concerns raised by the Kraken CEO has received positive support from the community. However, some members pointed out the hypocrisy of CZ disabling public comment on the post welcoming “questions and reviews”.
Related: Crypto exchange Kraken freezes accounts related to FTX and Alameda
In November. 19, CZ confirmed that it has begun work on building a secure centralized exchange (CEX), an idea it has floated Co-founder of Ethereum Vitalik Buterin.
In this case, the best case scenario would be to build a system that does not allow cryptocurrency exchanges to withdraw depositor funds without consent.
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